The Major Differences Between A Chapter 7 And Chapter 13 Bankruptcy

The major differences between a chapter 7 and 13 is that in a Chapter 7, there is no repayment plan. The debtor, or debtor’s attorney, files the case, includes all the information and documents required by the Court and by the bankruptcy trustee, and in most cases gets a “discharge” for their qualifying debts. Typically there is one in-person meeting with the bankruptcy trustee where the Chapter 7 trustee asks the debtor some very straightforward questions, verifies the debtors’ identity, and they are done. Once the trustee concludes that meeting, the debtor is (for the most part) finished with their part of the Chapter 7 bankruptcy and their debts will be discharged (forgiven/eliminated). They have no debt that they have to pay or worry about anymore.

In contrast, Chapter 13 is a repayment plan, it is where the debtor repays creditors over five years, so it is a much longer process and the process consists of making a monthly payment to the Chapter 13 trustee every month and creditors get a portion of the amount they are owed through the repayment plan. So in Chapter 7 there is no repayment plan to creditors, in Chapter 13, it is a five-year repayment plan to creditors, and the repayment amount is based on the debtor’s ability to make the payment – how much they have available in disposable income to pay creditors.

Choosing The Right Kind Of Bankruptcy For A Client

What we usually do is start the client with a Chapter 7 because for most people, it is preferable to have no repayment plan. If you can discharge all your debts with no repayment plan quick and easy and not have to make a payment for five years, that is typically much better or much more preferable for most people than repaying creditors over five years. If someone cannot qualify for Chapter 7, either because they have too much income or they have an asset that they would potentially lose in a Chapter 7 such as too much equity in the house, which is common in California, then we start talking about Chapter 13. In Chapter 13, we have to do an analysis of whether their Chapter 13 will be feasible, if they have sufficient income to fund a Chapter 13 plan, if the Chapter 13 trustee will recommend them for confirmation and if those pieces fall into place, then we are happy to file a Chapter 13 for them. Income and assets are really the determining factors.

Is It Easier To File For A Chapter 7 As Opposed To A Chapter 13 Or Vice Versa?

In my particular jurisdiction, which covers Los Angeles and Orange County California, Chapter 7 is much easier than Chapter 13. Chapter 13 is a much longer process and there are many more document requirements that need to be provided to the trustee and the court and for the most part, it is just much harder to qualify for a Chapter 13 than it is for a Chapter 7. However, some people still do not qualify for a Chapter 7, because they have too much income. But for most individuals, it is usually possible to find a way to get them into a Chapter 7 rather than a Chapter 13 by careful examination of their financial circumstances, income and necessary living expenses.

Which Type Of Bankruptcy Is Better For Credit?

My personal opinion is that Chapter 7 is better for your credit, because the minute that the case discharges, it starts ageing on your credit report. I do not think the actual reporting of a Chapter 7 vs. a Chapter 13 makes much difference, but the age of the bankruptcy certainly does make a difference and when Chapter 13 is open for five years, it does not start aging on a credit report until that plan and that case closes and the individual debtor gets a discharge. Chapter 7, it is quick and it is usually a few months and it is over and the case closes and they get their discharge.

At that point, when the case closes, the “trade line” starts aging and as it ages, it has less of a negative impact whereas in Chapter 13, that aging process does not start for five years and after the five years, only then does it start aging. For the individual who files Chapter 7, they could file and have their case be finished in a few months and use that five years to age their bankruptcy (and therefore rebuild their credit), so it is much less significant whereas the other debtor that filed Chapter 13 would have an open bankruptcy that whole time and their aging would not even start until their case finished at the end of the five years.

For more information on Chapter 7 Vs. Chapter 13, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (888) 728-0044 today.

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